I short stocks - and whilst I carefully examine the accounts and sometimes even stake out factories - mostly I find shorts based on people. Brokers and stock promoters with a history of fraud interest me. Lawyers are my favorite of all scumbags because some do the documentation for fraud after fraud after fraud and lawyers seldom get pinged. Stock promoters come-and-go. Lawyers are eternal!

I will short a stock (in very small quantity) based on an association with one suspect lawyer and one suspect promoter. I read the accounts if the stock goes against me - and depending on what I find I either increase my position or cover. If the stock just goes down (which it often does) I just take the profits and wish I had shorted more.

When one goes against me I think - yet again - of Steve Madden and his tarty shoe company. Steve Madden is my eternal nightmare.

But for that you need some background

Stratton Oakmont and Steve Madden

Stratton Oakmont was arguably the most fraudulent stockbroker ever to operate in the United States. Its founder (who went to prison) wrote about it in agreeable first person: The Wolf of Wall Street is a tale of high class hookers (known as "Blue Chips"), Quaaludes and stock fraud.

Every stock taken public by Stratton was a disaster and a fabulous short. They all crashed and burned. Every stock that is except one.

The except one is Steve Madden Shoes (SHOO:Nasdaq). And even that was a close-run thing.

Steve Madden was a small-time shoe designer going nowhere and frustrated with his lot working for larger shoe companies. He struck out on his own.

But he had no money - so - in the great tradition of America - he went cap-in-hand to Wall Street. [In Steve Madden's case it was probably cap on his head... but you get the idea...]

But Steve did not just go to Wall Street, he went to his childhood friend Danny Porush.

Danny was senior at Oakmont Stratton and Steve Madden shoes was dressed up in classic Stratton fashion. In other words the company was over-promoted (even fraudulently promoted) and the stock was manipulated. Jordan Belfort (the CEO of Stratton) had large undisclosed positions (he admits this in his book) and was actively involved in the manipulation of the stock.

Eventually the manipulation scheme comes crashing down. Steve Madden is charged with stock fraud and pleads guilty. He went to prison.

Something strange happens on the way to the stock manipulation

Usually this is the profitable end of a fraud-short. Usually, but not always.

Something strange happened on the way to the stock fraud. That something was Steve Madden. Madden always was first-and-foremost a shoe designer and an outrageous and outrageously successful one. Even by the time Madden was charged Steve Madden Shoes was on its way to being the most successful high-heel shoe company in the world. Teenage girls just love him.

I see fraud in accounts regularly enough. There is no trouble finding fraudulent companies and if you picked Steve Madden as a short you had indeed found a fraudulent company.

But it hardly helps. The money raised by stock fraud at the beginning of Steve Madden Shoes nourished the growth of a truly successful (and valuable) business.

Shorts - and there were plenty of shorts - had a really bad time with this one.

Every company I short I have to ask myself - even if I am sure this is dodgy - how do I know I do not have the next Steve Madden? To me that is the stuff of nightmares.

And here - just to rub it in - is a picture of Steve Madden with Katy Perry. Not only did he get the loot - but he seems to have got the girls as well.

As a short-seller photos like that just rub salt into wounds.

John

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The promised correction: I have now been followed on Twitter by Wendy Madden, Steve's wife and the mother of his children. He seems to have got the girl, but it wasn't Katy Perry.

Often I look at my short-book, a collection of scum, vile and villainy. And I wonder if under it all there is one or two decent people, another Steve Madden. I guess there is - but I will have to lose five times the initial stake on one or two shorts to find out.

As an investor you can be wrong in ways you never imagined. As a portfolio manager you have to allow for it.

It's amazing how when you write about shorts, it deeply affects me as a long investor; your insights are powerful. The universe is not only queerer than we suppose, it's queerer than we can suppose.Thanks for another reminder about how fragile we can be in the investment business.Cheers

John, finding a G2Z (goes to zero) is not that hard if one focuses on who the GC is or who did the S-1 if one prefers micro cap p&d's so don't give up on that theory. Refine the trading practices a little to time your shorts better, that's all.

I enjoyed your Shoofly commentary and you're right, JB was and remains a major d-bag. Did you read Joel Cohen's op-ed in the NY Times? He's the one who sent JB to Club Fed for a while.

Will SHOO outperform SKX this year? Will CROX blow them both away? How about NKE? Any juice left?

Was reminded of this post over the weekend when I noticed that the Steve Madden store in Sydney CBD Westfield has shut down - seems that Australian teenage girls don't love him as much as American ones.

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The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.